Thursday, December 18, 2008

In 2003, Burnie Burns got together with three friends and created Red vs. Blue—an animated comedy series set in the world of first-person shooter Halo. Nerds loved it, and within months nearly a million people were downloading each week's free show.

Burns & Co. decided they wanted to quit their jobs and work on the series full-time. So they figured out a way to do it: T-shirts.

Burns appropriated the comedy's wittiest one-liners and set up an online store to sell shirts and caps. Within months, he was filling hundreds of orders a week, generating enough revenue to pay everyone a salary. "The shirts," he says, "turned us from a hobby into a business."

Burns is not alone. Increasingly, creative types are harnessing what I've begun to call "the T-shirt economy"—paying for bits by selling atoms. Charging for content online is hard, often impossible. Even 10 cents for a download of something like Red vs. Blue might drive away the fans. So instead of fighting this dynamic, today's smart artists are simply adapting to it.

Their algorithm is simple: First, don't limit your audience by insisting they pay to see your work. Instead, let your content roam freely online, so it generates as large an audience as possible. Then cash in on your fans' desire to sport merchandise that declares their allegiance to you.

We're talking about a surprisingly big market. According to Impressions, a clothing industry trade publication, Americans spend around $40 billion a year on decorated apparel. At CafePress, a Web site that lets anyone customize and sell merchandise, users sold more than $100 million in goods in 2007—pocketing $20 million in profits—and overall sales are growing an average of 60 percent a year.

My 8 Funding Models to Support Digital Good Creation missed this "T-shirt economy" model of paying for bits by selling atoms. While I had a "sell an associated service" model, I missed this "sell an associated physical good" model. Here the digital goods creation works as advertising so you can sell people branded physical goods.

Of course, it is not clear to me why competitors couldn't just sell T-shirts with the artist's likeness and not give the artist a cut. There would need to be copyright laws to stop this from happening. But, if you are going to use intellectual property law protection here, why not just use it on the digital goods themselves and charge for them directly? Maybe though it is easier to stop copyright violations on T-shirts than MP3 files. Or maybe fans would be willing to pay more to purchase shirts if they knew the artist was being compensated and will avoid the competitors.